We hear it all the time: "Should I buy an annuity?"
There is a simple answer to this and a not so simple answer.
To begin with, you needn't even think about an annuity or not an annuity until you are approaching retirement.
But we recognise that if you are going to make a retirement plan you need to pencil in your options.
It used to be, prior to the pension reforms of the early 1990s, that when you retired your only option was to buy an annuity. Not so any more.
You have options.
Four of them in fact.
Option1: You can purchase an annuity
Option 2: You can Drawdown from your DIY Pension
Option 3: You can what's called an 'Uncrystallised Funds Lump Sum' (explained later)
Option 4: You can take a mixture of Options 1, 2, and 3 above
Back to the question: "Should I buy an annuity?" We cannot give you advice, we can only give you our opinion.
Annuities we do not think are a good buy. So, for us, that would rule out Option 1 above.
Whether Options 2, 3 or 4 above are worthwhile investigating - read on.
"Shoud I buy an annuity?" is a simple question for us to voice an opinion.
Our opinion is emphatically: No! You should not buy an annuity.
But before we answer that question more fully, let's define what an annuity is, so we completely understand whether we should have an annuity or not.
Say you are approaching 65, planning on retirement and have accumulated a Pension Pot of £300,000
And let's say you are seriously looking at Option 1 above.
Annuities can be purchased from any number of insurance companies who will then convert your retirement pot into an income - for life. If you do go down this route it is irreversible once completed.
That income can be paid to you monthly, bi-monthly, quarterly, yearly, or whatever time interval you prefer - for as long as you live.
But therein lies the snag: For as long as you live.
Nobody knows how long they are going to live.
If you are in good health you may live until you are 100. Who knows? Or you may get knocked down by a bus tomorrow.
If you have underlying health problems, the annuity provider will quote you slightly better figures. But you still don't know how long you are in this life for.
You can also purchase a joint annuity togther with your spouse. This will, of course, provide you with a reduced income (there would now be two of you covered).
Take a look at this website to get a really good idea of what annuities are: Annuities
Nope it does not sound at all good to us. You work all your life. You've scrimped and scraped to get to that £300,000 figure and it could be all gone in a flash.
Not a good option at all.
The Pension freedoms introduced in the early 1990s recognised this and alternatives to buying an annuity were introduced.
The flavour of the day right now is Option 2 and 3 as set out above.
Option 2 is Drawdown.
Option 3 is kown as 'Uncrystallised Funds Pension Lump Sum'
It's easy to see why these are popular. You have the opportunity to get your grubby hands on your whole Pension Pot.
Once you invoke Drawdown you are immediately allowed to withdraw from your Pension Pot twenty five per cent (25%) of its value TAX FREE.
Thereafter, you are permitted to drawdown the remainder of your pot as frequently or as infrequently as you wish (less tax at your standard rate).
You may take the rump of your portfolio at equal periods, say monthly, or you may draw lump sums periodically. It's your choice.
There is an obvious danger with this option. You may drawdown ALL your money too quickly leaving you with nothing in your DIY Pension.
So if you opt for this Option, you will eed to be disciplined.
There is however, a big advantage to this Option. And that is after you've taken your 25% tax free lump sum, you can carry on investing the money in your DIY Pension (i.e. SIPP) thus benefiting from further growth.
However, if you are hell-bent on taking an annuity because somebody has persuaded you that it's only prudent to have a fixed income for life.
If that's the case and you're sold on this "income for life" con then don't talk to your financial advisor, talk to your SIPP Provider. He'll know more about Drawdown and Annuities than your financial advisor will ever know.
Talk to him about Option 4 as described above.
The questions was: "Should I buy an annuity?"
Our opinion is "no" you shouldn't. But don't take our opinion. Talk to your SIPP Provider and get good advice from a true professional.
Again, our opinion is that you have grafted all your life and saved for what you have in your Pension Pot. Don't risk it all going down the plughole of some insurance company.
It seems like common sense to us.